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Understanding Construction Loans

If you are like most people, you need to borrow money to build your dream home. Follow this basic guide to understanding construction loans and how they work.

Understanding Construction Loans
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Some log home buyers are in a fiscal position to finance their homes themselves, which is great! But if you’re like most, you’re going to need to borrow money.

If you are purchasing a pre-existing log home, the process mirrors every other kind of home loan. But if you’re building from scratch, you’ll likely need two loans. One is the standard mortgage, ranging from 15 to 30 years. The other is a short-term construction loan.

The construction loan pays for the materials and labor needed to build your home. These loans are made for periods from six to 18 months and have higher interest rates than mortgage loans because, as far as banks are concerned, they carry more risk. Lenders will want at least a 20 percent deposit on a construction loan because of that risk. Typically, you pay only the interest until the project is completed and the mortgage takes over and adds the construction loan principal.
 

Before granting construction loans, lenders carefully study the project and evaluate the builder’s ability to complete the home according to the plans, budget and schedule. Once the loan is granted, the lender disburses the money according to a draw schedule, which pays certain amounts at various milestones to cover work completed up to that point. Progress is verified by onsite inspections, which determine that the labor was performed and the specified materials were used.

A big difference between construction loans for log homes and other custom homes is that the log home company providing the package expects to be paid a substantial down payment before cutting and shipping the logs. Avoid making a large down payment for your package until you’ve secured your financing.

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